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AOL fights IM fade-out

The company begins testing a video instant messaging feature--the latest sign that AOL is losing ground to rivals Yahoo and Microsoft in an area it pioneered.

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America Online is warming up to instant messaging video features that it once dismissed as irrelevant, in the latest sign that the company is playing catch-up to rivals in a key communications technology that it pioneered.

AOL on Monday confirmed that it has begun testing a feature that lets subscribers swap video clips over its instant messaging software. The feature, dubbed "record and forward," lets people record video through a Webcam and send the file to another AOL IM user via a peer-to-peer connection. Recipients play back the video as a downloaded file, not as a live stream.

"What we are seeking to do with this record and forward video feature is to test its adoption and popularity with our audience and determine its potential as a possible feature within a future AOL client," AOL spokesman Derrick Mains said in an e-mail. "Although video over IM has yet to take off with a mass-market audience, we have seen it begin to catch on among early adopters as other services offer it as a feature."

The decision to explore new features for IM comes amid broad disarray at AOL Time Warner's AOL division, which is seeking to revamp its service to stem defections to high-speed Net providers and lower-priced dial-up services while fending off investigations of its accounting practices. The effects are being felt even in its IM business, where the company's ICQ and AOL Instant Messenger (AIM) services have dominated for years.

AOL's test marks a significant reversal for the company on the IM development front. Until recently, AOL executives discredited video IM's consumer appeal and prided themselves on keeping IM free from the bells and whistles adopted by competitors such as Yahoo.

AOL far outstrips competitors in sheer number of IM users, but its market share appears to be slipping, according to data provided by Internet traffic measurement company ComScore Media Metrix. Combined users accessing AOL's network from the Web and its proprietary online service hit 59.7 million in March, with an additional 6.2 million users on its ICQ network, ComScore reported. Those numbers are down from January, when 62 million unique users accessed AOL's Web-based and proprietary AIM services, and 8 million logged on to ICQ.

Over the same period, Microsoft's MSN Messenger climbed from 22 million to 23 million combined unique users and Web site visitations, ComScore said. Yahoo slipped from 20 million to 19.5 million.

Merger burden
AOL stands to gain if it can successfully play the victim before regulators. AOL's chief rivals, Microsoft and Yahoo, have launched Webcam features through their respective IM services, allowing live video to be streamed between users. But AOL has been barred from easily following suit, thanks in part to conditions placed on the 2001 merger that created AOL Time Warner.

The battered AOL unit earlier this month seeking to lift restrictions barring it from offering advanced instant messaging-based high-speed services (AIHS). The document argued that AOL's IM services do not hold a dominant market share advantage over MSN and Yahoo, and that interest and innovation have made IM more competitive.

"Over the past two years, both Microsoft and Yahoo have grown and continue to grow relative to AOL..." the petition read. "Indeed, they have innovated and become 'first movers' for streaming video AIHS. As a result, predictions that the merger would allow AOL to dominate a single IM 'platform' upon which all others depend have proven to be incorrect."

Under the current FCC restrictions, AOL can offer AIHS services such as video streaming only if it opens its proprietary network to rivals. AOL has promised to study interoperability, and has promised a new version of AIM that will interoperate with its own ICQ product.

It has also struck a deal to host IM services for Apple Computer under which AOL powers the computer maker's iChat client. Earlier this year, the company began testing a service that would hook up with IBM's Lotus Sametime corporate instant messaging product.

But neither the Apple nor the Lotus arrangements rely on server-to-server interoperability, which would allow a competitor such as Yahoo to link its IM subscribers with AIM directly. AOL last summer said it was backing off of plans to establish server-to-server interoperability in favor of hosted deals, saying that security and other problems were proving exceptionally difficult to solve.

AOL's test does not violate the FCC order because it does not involve live streaming, according to AOL's Mains. He said the feature is being tested on a beta version of its flagship proprietary online service, and left open the possibility of extending the tests to its Web-based AOL Instant Messenger (AIM) service.

AOL has until now consciously avoided adding new features to its IM service, citing a lack of demand.

In an interview in July 2001, some six months after the FCC ruling that shepherded in the AOL-Time Warner merger, former AOL division CEO Barry Schuler described the reasoning behind AOL's decision not to add new features to AOL's IM products.

"We have experimented with features on AOL IM," Schuler said in an interview at the time. "We have tested over the years and have had operational over the years the ability to add videos, the ability to transmit videos over real time, the ability to do voice. And in the end, it's not something consumers are interested in. It's not to say that there aren't applications in the enterprise world and other places that would make sense. It's just not the business we're in. It also happens to be a business that Microsoft is very good at, and if Microsoft is interested in pursuing messaging-based applications in the enterprise market, that's great."

Times have changed.

Eyes on the enterprise
Microsoft in particular has increasingly placed IM at the center of its real-time communications strategy, which plans to help enterprises meld all Internet-enabled devices--Net phones, PCs, PDAs, cell phones and the like--under a central server software framework.

The first version of Microsoft's Real Time Communications Server 2003, due out this summer, will

Special Report

Instant messaging, corporate software
vie for position in the workplace.

offer an enterprise version of its Windows Messenger IM product. Eventually, Microsoft plans to upgrade RTC to support voice, videoconferencing and data exchange under one umbrella. Microsoft already bundles Windows Messenger into its Windows XP operating system.

Yahoo Messenger has supported Webcam use since June 2001. It has since upgraded to allow high-speed video streaming between two IM users. In December, 7.5 million of the people chatting over YIM were using video, the company said.

In March, MSN Messenger, Microsoft's free Web-based IM service, launched a Webcam feature powered by Logitech. The company declined to answer questions about usage to date.

Analysts differ on the demand and potential demand for video IM, with some calling it a promising and inexpensive medium for corporate videoconferencing, while others write it off as the Internet version of traditional telecommunications' most famous technological dead letter.

"The videophone has been a holy grail for well over 40 years," said Ross Rubin, analyst with eMarketer in New York City. "It would be amazing if it came to fruition through AOL Instant Messenger."

Other consumer applications of the technology include dating and sex sites--Yahoo in January introduced video into its personals service, and video communications flourish in the company's sexually themed chat rooms. Some start-ups, including, make money by hosting both sexual and nonsexual video IM chats.

Whether video IM has substantial enterprise applications may be a more consequential question for providers looking to turn video chat into revenue.

"It's been curious to see how companies struggle to turn the IM services into a revenue generator by going to the business community," said Stephen Kim, analyst with ComScore. "IM is designed for teens and home users, but now there's a lot of business use. So video could be a way for the messengers to extend their hold on the work environment, if the businesses adopt it as a cheaper way of getting videoconferencing."

Most IM providers have taken a keen interest in the enterprise market. Yahoo this month launched a program to promote its product to corporations, while Microsoft this month outlined its plans to converge instant messaging with other corporate communications tools. Late last year, AOL released a version of AIM specifically targeted at the enterprise market.

But video IM will have a ways to go before it becomes a serious videoconferencing contender, Kim warned.

"If it's slow and jerky the way it is now, and doesn't provide a lot of utility, no one will use it," Kim said.